Tens of millions of people get Social Security benefits, and the majority of them choose to start getting them well before they reach full retirement age. In fact, many take Social Security as soon as possible once they turn 62. Moreover, what some realize for the first time when they apply for Social Security is that you don't even have to wait until you've actually quit working to receive benefits.
Unfortunately, there's a catch for those who work and want to receive early Social Security benefits. If your earnings exceed certain limits, you can end up forfeiting a portion of your Social Security back to the federal government. That's not as big a deal as it sounds, because there are some compensating factors that come into play if you forfeit benefits. However, those factors make it extremely complicated to understand exactly what the end result is. Here, we'll try to simplify things to help you make a more informed decision in deciding when to claim your Social Security benefits.
When forfeiture comes into play
The first thing to understand about forfeiting Social Security benefits is the earnings test. Those who haven't reached full retirement age and make more than certain thresholds stand to lose all or part of their benefits for the year.
There are two thresholds that apply to people in different situations. The first applies to anyone who will be younger than full retirement age throughout 2019. If your earnings are more than $17,640, then you'll lose $1 in Social Security benefits for the year for every $2 you make above that amount. As an example, those who earn $20,000 this year stand to lose half of the $2,360 excess over the threshold, or $1,180.
If you're going to reach full retirement age during 2019, there's a different number to look at. In that case, you can earn up to $46,920 before any forfeiture occurs, and it'll take $3 in excess earnings above that amount for you to lose $1 in annual benefits. Importantly, the Social Security Administration only looks at earnings for the part of the year before you reach full retirement age in calculating the amount forfeited.
More nuanced provisions apply to those who first apply for benefits during 2019. In that case, the SSA will take the annual threshold and pro-rate it on a monthly basis. For example, if you claim halfway through the year, then only your earnings in the second half of 2019 will matter for these purposes, and the threshold amount will be equal to six months multiplied by $1,470 per month, or $8,820. In other words, what you earn before you claim doesn't matter -- you only have to worry about earnings after you start receiving benefits.
What happens to what I forfeit?
As soon as the SSA determines that your earnings are higher than the thresholds, then you'll start seeing benefit reductions. Some people report the earnings directly, but your employer's records will also provide this information to the SSA.
The SSA withholds benefits starting at the beginning of the year and working forward. So if you get $1,000 a month from Social Security and you'll need to forfeit $2,000 based on your earnings, then you won't receive payments for January and February, and your regular benefits will return in March. If it doesn't work out evenly, then you'll get a reduced check in the month in which you start getting benefits again. If it turns out that earnings differ from what the SSA expected, it'll take appropriate action the following year.
Contrary to what some believe, you don't directly get back the money that you forfeited once you reach full retirement age. What happens is that for every month of forfeited benefits, your future benefit amount will be recalculated as if you had claimed your benefits a month later than your true start date. That will increase the amount you get from Social Security after full retirement age, but there's no guarantee that you'll receive enough in benefits in the future to make up for what you lost.
Be smart about Social Security forfeiture
If you anticipate forfeiting most or all of your Social Security benefits, then it generally makes sense just to wait until later to claim them in the first place. The net result of the forfeiture provisions often ends up being similar to what would've happened if you hadn't claimed early -- but that doesn't mean that you'll necessarily recover everything you've lost, even in the long run.